As discussed in our quarterly overview, the oil & gas sector experienced a relatively stable price environment as compared to the volatile energy prices seen in the first half of the year.  The third quarter saw the WTI range narrow and hover around $40 per barrel, in line with industry participant expectations of nominally higher prices than in the second quarter.

However, the concurrent overlapping impact of (i) discord created by the OPEC/Russian rift and resulting supply surge; and (ii) the drop in demand due to COVID-19 related issues was historic and continued to play a role in the third quarter.  As if COVID-19 and the Russian-Saudi price rift wasn’t eventful enough, the regulatory shakeup expected to come from the Biden administration following the November election will add to the mix for what seems to be an already pressing and critical time for the industry.  The unfortunate, overlapping timing of these events has made the bankruptcy courts busy with no indication of that trend coming to a halt.

In this post, we capture the key takeaways from E&P operator third quarter 2020 earnings calls.

Theme 1: Continued Cost Reductions Lower Break-Even Prices

One recurring theme among E&P operators in our prior E&P operator earnings calls was the continued focus on reducing operating costs and capital expenditures in the pursuit of increased efficiencies. All six E&P operators we tracked in our current quarterly overview saw gains along these lines, evident by positive free cash flow in Q3 due to a decline in break-even prices.

Theme 2: Continued Emphasis on Debt Reduction and Shareholder Dividends

Another recurring theme in our prior quarterly analysis was the focus by E&P operators on reducing debt and reinforcing dividends.  The panel of operators we tracked in this quarterly earnings call review was split almost evenly among those who were still focused on debt reduction and those who put the return of capital to shareholders as their top priority.

Theme 3: Uncertainty Lies Ahead

Despite the relative stability of oil and gas prices in the third quarter, E&P operators continue to project significant uncertainty for their industry.  The critical near-term factors affecting their forward outlook include regulatory changes for the oil and gas industry as put forth by the Biden administration, an upcoming meeting of OPEC+ producers in December, and the potential timeline of effective and available vaccines to curb the energy demand shock brought on by the  COVID-19 pandemic.

On the Horizon

Broadly speaking, the E&P operator earnings calls suggest an uneasy calm. The question is, has the oil and gas industry emerged from the first major quake and should it expect relatively minor aftershocks, or is it in the eye of the storm, experiencing a brief respite before the tempest picks up again?  Overall, it is clear that oil and gas operators can not only weather the storm, but still produce free cash flow that is significant enough to shore up the balance sheet and return capital to shareholders while concurrently maintaining lean operational and capital programs.  This modus operandi, however, comes at the cost of highly subdued expectations for growth (with one noted exception among the six E&P operators we monitor).

Throughout the earnings calls, we noted that management outlooks that included flat or even slight production declines over the near-term horizon were not considered to be “downside” scenarios, but evidence of, if nothing else, at least sustainable ongoing operations.  Additionally, we noted that at least half the E&P operators discussed continued efforts to support and advance various ESG initiatives, including proactively reducing emissions, and imparting stronger positive impacts on the local communities in which the companies operate.

Regarding M&A activity, there was not much commentary regarding overall industry trends, but the overriding thesis was brought up in a number of calls that the focus of any such activity should be on “not necessarily bigger, but better.”